The aim of the Modern Portfolio Theory is to provide to a portfolio owner the tools necessary to implement an efficient and sustainable strategy focusing on minimizing the risk. According to this theory, risk is supposed to be reduced through the choice of a diversified portfolio. In fact, enlarging the scope of investments on a large range of market allows for the reducing of the risk by being less dependent of a single value. In addition, the application of the theory allows the trader to determine the value of an asset comparing the potential return with the risk. Several theories have been established to determine this value and the following paper will focus on the followings, Markowitz and the capital asset model, which are considered to be the most efficient. An efficient trading strategy doesn't mean to take major risk in order to get high return, it appears crucial to reduce the risk as much as possible in order to benefit from a sustainable growth of the portfolio's value. Regarding the Modern Portfolio Theory, the first key point to analyze appears to be the relationship between the risk and the potential return.
[...] In this way the methodology to use is to quantify the risk through coefficient. This has to be done with the key coefficient alpha and beta. The coefficient beta measures the volatility of an asset. The coefficient alpha is part of the risk of an investment. These coefficients allow the determination of the Security Characteristic Line (SCL) which is a straight line representing the relationship between the market return and the return of a given asset at a given time t. [...]
[...] Our main expectation was the clarification of the situation of Google. Regarding the evolution we were very satisfied about it because we made more than 30 000$ only on Google. conclusion REGARDING OUR STRATEGY, WE BOTH INVESTED ACTIVELY AND PASSIVELY. AS REGARDS TO THE DEFINITION, WE INVESTED PASSIVELY IN ASSET CLASSES CONSIDERED TO BE VERY EFFICIENT, AND WE INVESTED ACTIVELY IN ASSET CLASSES CONSIDERED TO BE LESS EFFICIENT. IN ADDITION, THROUGH THE STOCKTRAK, WE HAD THE OPPORTUNITY TO USE TECHNICAL AND FUNDAMENTAL ANALYSIS. [...]
[...] This case is the example of the perfect inverse correlation The Markowitz Theory The Markowitz theory allows us to determine optimal portfolios along what is called the efficient frontier. This efficient frontier has to be determined by comparing expected return with the risk. The following graph is an example of the determination of this frontier. To determine the frontier, we have to know the risk free rate associated with the portfolios. Then, we can determine the intersection of the portfolios with minimum variances and the portfolios with the maximal return. [...]
[...] In other terms, beta represents the relation between the stock value and the market value. If Beta is equal to it means that the stock will follow the trend of the market. If Beta is higher than it means that the stock is risky, thus the stock will not follow the trend of the market and the variations will be amplified. On the other hand, if Beta is lower than the share is not risky and will follow the trend to the market in a minor way. [...]
[...] passive investing When building a portfolio strategy, the main choice to take remains whether to invest actively or passively. On the one hand, passive investing consists in purchasing diversified portfolios of all the securities in an asset class. On the other hand, active investing consists in overweighting securities and sectors within an asset class believed to be undervalued and underweighting securities and sectors believed to be overvalued. In this way, the example of the purchase of a stock is an active investment that can be measured against the performance of the stock market itself. [...]
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